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Understanding HMO Mortgages
Buy-to-let mortgages for HMO properties are simply referred to as HMO mortgages. These are loans used to purchase an HMO, with the property used as security for the debt.
HMO (House in Multiple Occupation), is a term used by the government to explain:
“A property rented out to at least three people who are not from one household, but share things like the bathroom and kitchen.”
The key term here is: ‘Household’. A household is classed as a property used by couples who are married/living together, families or relatives. These do not fall under HMO rules.
Another term often used to describe an HMO property is a ‘house share’. This could be students renting one property or workers sharing a property. An example of this could be a four-bed house, each bedroom has its own door lock and is let to a single tenant. The individual letting rooms are not self-contained meaning they all share a kitchen and bathroom, unlike a flat.
Typical HMOs could include:
- Shared housing
- Privately run halls of residence
- Employee housing
The Difference Between Buy-to-Let & HMO
A buy-to-let or single let property is, for example, a house rented out to a single family unit. An HMO property, however, is let to multiple (three or more) tenants, such as students. This will require an HMO mortgage.
There are advantages and disadvantages of both. A single buy-to-let is simpler to manage but if the tenant moves out, there could be a rental void. As an HMO has several tenants this void is less likely.
Landlords are attracted to HMOs as they often offer greater rental yields and, subject to a strong location, it can be easier to find tenants. Students, companies and housing associations are all good examples of likely tenants for HMOs. Tenants are attracted to HMOs as they can be far more affordable. They are popular in high-value rental areas as the cost is shared by more paying residents.
Take the example of an HMO property used to house temporary workers (e.g. contractors). It’s highly likely that good rents will be received and there will be a steady stream of tenants. Even better, the company may pay the rent regardless of whether they have put a worker in there or not. This saves you the hassle of having to find new tenants every time someone moves out.
As the structure of the tenancies differs from that of a simple buy-to-let, HMO mortgages can be a little more complex to arrange. An experienced HMO mortgage broker can make the process hassle-free.
Is An HMO Licence Required?
Any property deemed a ‘Large HMO’ will need to have a valid HMO licence in place. According to the UK government website, an HMO is considered to be large if all three of the following apply:
- It is let to five or more separate tenants forming more than one household.
- It is three or more storeys high.
- Tenants all share a bathroom, kitchen and toilet.
Different councils may have different rules regarding licencing, therefore, even if your property does not fall into the above description, it is worth contacting the local authority to find out.
You must have a separate HMO licence for each HMO property you run. An HMO licence usually lasts for five years and must be renewed before it runs out.
When applying for an HMO licence, the council will want to make sure:
- You or your letting agent are deemed to be ‘fit and proper’ with no criminal convictions or breaches of the landlord code of practice etc.
- The property is a suitable size and facilities are adequate for the number of tenants.
The council will also require:
- That you send them an up-to-date gas safety certificate every year.
- Have adequate, maintained smoke alarms fitted.
- Provide them with safety certificates for electrical appliances.
When applying for HMO mortgages, the lender may want a copy of any licences. If your HMO property requires a licence, you can apply for one on the ‘gov.uk’ website.
Can I Convert A Property Into An HMO?
The simple answer is yes, subject to planning permission. However, it’s worth bearing in mind that not all lenders will allow this.
ABC Finance Ltd has access to HMO conversion products which are ideal for this approach, regardless of the level of work involved. The interest rate will be higher whilst the work is carried out but a lower rate will be available when the work is complete. This is often referred to as a bridge-to-let product.
In some cases, we can arrange a property refurbishment loan whilst having the long-term mortgage pre-approved and ready to complete. In these circumstances, you are able to move to the cheaper long-term loan as soon as the work is complete.
Is Planning Permission Required?
This depends on the location and also the property itself, it’s worth checking with the relevant council. An HMO is usually designated as C4 usage. An HMO property, whether licensed or not, will fall into this group.
The General Permitted Development Order streamlines the process by allowing change of use from C3 (residential property) to C4 (HMO) without planning consent being needed. This is a major benefit to smaller HMOs.
A ‘Sui Generis HMO’ describes a larger HMO property that doesn’t fall under C4 usage. Sui Generis HMOs may need planning permission, but this will be on a case by case basis. C3 to Sui Generis will likely need planning permission, however, C4 to Sui Generis may not.
HMO Valuation Method
The main two variants of HMO valuation are as follows…
- Bricks and Mortar Valuation: This is the standard method of valuation for most types of HMO property.
- Commercial Valuation or Investment Valuation: This is the value based on the overall investment or business rather than just the building itself.
Many people assume that when a property is converted to an HMO, it instantly increases in value due to the rental yield, however, this isn’t strictly correct. For a standard residential house converted to an HMO, most mortgage providers will base the LTV (Loan to Value) ratio against the bricks and mortar value. This is something worth considering when looking to invest in HMO property.
Take, for example, a street full of four-bed terraced houses all valued at around £100,000. All of them are either owner-occupied or let to single family units on ASTs (Assured Short-hold Tenancies). If one of those properties was converted to a four-bed HMO at a cost of £10,000, it would be unlikely to now value up at £180,000 for mortgage purposes.
A purpose-built student block of 30 rooms let to a university on a five-year lease could, however, be mortgaged against the investment value.
HMO Mortgage Lenders
With HMO’s becoming more and more popular, there are HMO mortgage lenders available to suit almost everybody. Each lender will have its own criteria but with hundreds of products available, finding the best product to suit you should be straightforward.
The Benefits Of Using A Specialist HMO Mortgage Broker
The advantage of using a whole-of-market broker is that you can access all HMO mortgage providers through one enquiry. An experienced broker will usually gather key information about what you’re looking to do and about you as a borrower before finding the best rates to suit your circumstances.
Don’t be concerned about being asked a lot of questions when applying for an HMO mortgage. The more information a broker has available, the more they are aware of an applicant’s circumstances and needs, which will help them source the best deal.
For example, when applying for HMO mortgages, the applicant will definitely be asked about:
- The property – location, number of letting rooms
- Your experience as a landlord
- Sourcing tenants – will the tenants be sourced directly, or through an agency?
- What demographic will your tenants likely be?
- Licensing – will the property be a multi-let or licensed HMO?
- The business plan – expected rental income, covering rental voids etc.
- Personal income/expenditure/assets/liabilities
- Your credit rating
- How you will repay/borrow – personally, or through a company?
The only real disadvantage is that you may have to pay a fee for this service, you should ask the broker how much this fee is during the initial conversation.
As a common rule, we don’t charge broker fees on loans above £150,000. However, on smaller loans, this will be considered on a case by case basis. We aren’t tied to any one lender and are totally unbiased, our only interest is in securing the best deal for you.
ABC Finance Ltd has built up strong links with lenders over the years which help when guiding an application through to completion. We are able to search the whole market quickly to secure you the best terms available whilst offering you honest advice and market leading rates.